Taxation of Crypto Assets
HM Revenue & Customs (HMRC) has added to its raft of manuals with a new one on crypto assets in recognition if their increasing use. Crypto currency is a dynamic area and, reflecting its relative infancy, there is a lack of clarity – not least, in the realm of regulation and tax treatment.
Crypto assets such as Bitcoin and Litecoin are a 21st century phenomenon and are a legitimate digital currency used as an alternative to traditional money. But trading in crypto assets is still rare, as HMRC acknowledges.
Published on 31 March this year, the new manual sets out how HMRC taxes crypto assets and says it will be adapted in tune with changes to the law and regulation changes. However, there is a key concern which businesses and their advisers ought to note at the outset: there is no legislative framework yet in place governing the treatment of crypto assets.
The Manual therefore recites and consolidates HMRC’s interpretation of existing tax liabilities and tax laws - which could lead to disputes further down the line. Problems are particularly likely given HMRC’s admission that the tax treatment of crypto assets will continue to develop.
Essentially, HMRC makes clear that crypto assets are not treated as money or currency, rather as other assets for the purposes of tax. This means an individual’s income tax would typically apply to crypto asset trading. Where crypto assets as investments are disposed of, capital gains tax may arise.
Key points of note
Different crypto assets – Different types work in different ways. The main ones are exchange tokens, such as Bitcoin (mainly used for payment and investment); utility tokens giving access to goods or services on a platform; security tokens; and stable coins.
Tax treatment – How they are treated for tax purposes depends on the nature and use of the token itself. Note that exchange fees are an important consideration for HMRC staff when looking at a person’s or business’s tax position and may attract a deduction depending on what type it is.
Exchange fees – These include:
· Deposit fees (charged when fiat currency is deposited with the exchange)
· Conversion fees (if the fiat currency isn’t supported by the exchange)
· Trading fees - typically forming a percentage of the trade being requested and will be payable regardless of whether the trade is to acquire or dispose of tokens; and
· Withdrawal – either for withdrawing fiat currency or withdrawal of tokens.
Keeping records
It is vital for individuals and businesses to keep their own records for each crypto asset transaction. Records in a wallet should show balances and transactions.
Bear in mind that HMRC staff are told it is reasonable for them to request electronic record details with full details of transactions and any supporting valuation records for the “acquisition and disposal tax points” – but note that crypto asset exchanges may only keep records of transactions for a short period.
This is an evolving area of law, tax and technology and HMRC is onto it. It is therefore wise to take specialist advice from tax experts to ensure you understand the tax implications of using crypto assets and how HMRC may approach it.
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